David Cay Johnston on your tax dollars at work for the super rich

David
Cay Johnston is not what you would call a dispassionate journalist. Over his
four-decade career he has exposed police corruption, media manipulation, and
lax industrial safety standards. In 2001 he won the Pulitzer Prize for his
investigative reporting at the New York
Times. And in his new book, Perfectly
Legal: The Covert Campaign To Rig Our Tax System To Benefit the Super Rich ---
And Cheat Everybody Else, he takes on the federal government, corrupt
politicians, and billionaires who cheat on their taxes. (To read our profile of
Johnston, and part one of this article, go to www.rochester-citynews.com.)

In last week's installment Johnston
talked about ways the rich get richer under George Bush's tax cuts, the myth of
the "death tax," and the way top campaign donors pressure politicians and
influence tax policy.

This week Johnston talks about
insurance policies used by the rich to avoid paying taxes, how the Internal
Revenue Service goes after the poor than the rich, and why he thinks it's
important that people pay their fair share of taxes. We began the second half of
our interview by asking Johnston about the growing problem of off-shore
American businesses.

Johnston: If you're a
company and you move your headquarters off shore, we reward you right now for
doing that. We shouldn't do that. If you want access to the US market, you've
got to pay US taxes! If you rent a mailbox in Bermuda and then declare yourself
a Bermuda company, resident in Barbados, and convert your US profits into tax
deductions you ship off shore, you're being unfair to other businesses.

Stanley Works did not get to go to
Bermuda because of my focusing on them, but their competitor, Ingersoll-Rand,
had already gone. They compete in the automatic door and other businesses, so
now Ingersoll-Rand has a government-sanctioned competitive advantage. I'm
sorry, I believe in a level playing field.

In Congress, the Democrats and the
Republicans began fighting over who was going to be tougher on companies that
do this. No legislation was passed. After last fall's elections, the
Republicans passed their bill, an absolute, ironclad bar on Bermuda/Cayman
Islands/Panama companies having federal contracts. But the subsidiary in the
United States can have a contract. It's an absolutely meaningless reform.

What I don't understand is why the
businesses that have been wrongly treated haven't been in the forefront of
saying that's not fair. The reason is every one of them has dirty hands. You
can't publicly plead we have been unfairly treated if the other side can come
back and show that you got this or that favor somewhere else.

City: All of this relates to something called
limited liability partnerships.

Johnston:
In the corporate professions of accounting and law, the traditional form was a
partnership under which each partner is equally liable for a wrongful act. It
is a powerful incentive for good behavior. When we created limited liability
partnerships after the savings-and-loan scandals showed there had been a
breakdown in the system at some firms, we just encouraged that bad behavior.

Now we have Enron, Global Crossing,
Adelphia, and all these other scandals, all of which trace back to the limited
liability partnership. Instead of engaging in real principled reforms that
reward good behavior and put you in a position of danger for bad behavior,
government rules are rewarding bad behavior. That's happening because people
are making pleadings and there is no public debate going on about these issues.

City: You devote a chapter to a worker at Global Crossing and
show how his dream of a lifetime of work at a local phone company turned into a
nightmare.

Johnston:
Global Crossing is a much more serious scandal than Enron, but there will be no
indictments or arrests because they managed to keep this company, with total
revenues over its lifetime of $200 million and a stock market value of $50
billion, in business for, I think, 41 months from inception to bankruptcy.

If you're on a jury and they go
after these guys and the prosecutor says, "This was all set up as a scandal
from day one," all the defense has to do is say: "Reasonable doubt, the market
didn't turn out the way we thought. And it's not our fault the stock price went
through the roof. Yes, we tried to pump up the stock price, but the market did
it."

The warning should be: Global
Crossing is a roadmap; here's how to steal $5.2 billion because that's what the
insiders made. What other flaws do we have in our system that would allow
people to do that?

City: In many of these abuses --- like tax
shelters, where people hide their true income --- you show that Congress looks
the other way.

Johnston:
Members of Congress are not bad people; they're responding to the incentives
around them. And the incentives are to take care of the political donor class,
because that keeps them in office.

When I was covering the LAPD, I
interviewed a bunch of young men in a park in South Central LA. They said, "You
grow up, you join a gang, you gangbang, you rape, plunder, pillage, commit
crimes, and then, whether you did it or not, the police come and throw you in
prison. So why not have fun?"

It sounded very cynical until you
understand what [William] Blackstone wrote. Everybody has heard the first part
of this quote: "Better that a hundred guilty men go free than one innocent man
be wrongly imprisoned...." The quote goes on: "lest no man have reason to obey
the law."

If they're going to arrest you
whether you've committed a crime or not, why not commit a crime? We are
creating a system, as a result of the political donor class, that rewards bad
behavior. We attack the IRS, we handcuff law enforcement, and what is the
signal we send to the richest tax cheaters in America? Keep cheating! There's
no risk.

The treasury department recently
announced, as part of its get-tough crackdown, that they're going to get really
tough with tax-shelter promoters and they're going to impose a 50-percent
penalty. You get to keep half of your fee, so if you collect $100 million in
fees, and let's assume your costs are 50 percent --- they're not, they're
virtually nothing --- then you would make zero [after the penalty]. But where's
the penalty? The penalty should be that if you create an abusive tax shelter,
it's a 200-percent penalty.

City: In the middle of a mind-numbing array of examples of
millionaires saving hundreds of millions on taxes, you cite examples of poor
people, one making $7,000 a year, being audited by the IRS.

Johnston:
The IRS are the tax police; they do what the politicians tell them to do: focus
your resources on people down the income chain. So when a guy like Peter Coons,
who was the chief tax collector for Northern California, went after two
wealthy, politically connected families that owed taxes, they found a pretext
[downloading pornography] to move him out of his job after a totally
distinguished career. The message was: You do not go after politically
connected rich people. That's the scandal. I don't understand why the rest of
the news media isn't all over this. The incentive system for the media is to go
after: Who is Jennifer Lopez sleeping with?

City: Another popular tax scam you write about
involves insurance.

Johnston:
Go back to 1913 when we adopted the income tax. America was a very different
country. About a quarter of Americans were still on the farm. Most people who
were not on the farm had industrial jobs. They were dangerous; people died.

We've made big advances. The number
of children who die in fires is a tiny fraction of what it used to be. Far
fewer people die in airplane crashes than used to. Automobiles are safer. But
in 1913, when there were lots of industrial injuries and deaths, it was decided
that you should exempt these one-time windfalls [insurance payments] if Dad
died on the job --- and it was almost always Dad then --- so that the widow and
the kids could go on. And people had insurance if they had brains in their
heads.

Now the middle class has far less
insurance than they used to have. They have 401K plans. Insurance has become a
vehicle for the super wealthy to avoid not only estate taxes, but gift taxes
before death, and even income taxes in very sophisticated plans. And Congress
has put no limit on this. There's a limit on your house. You can only deduct
interest on [up to] a million-dollar mortgage. Congress limits how much you can
save in your 401(k) plan and your IRA.

But there's no limit to how much you
can funnel through an insurance plan. And there are people who have
billion-dollar life insurance policies to escape taxes. It's routine now to
sell eight- and nine-figure insurance policies. There's insurance used for
investments. You buy a portfolio of stocks and bonds. Instead of it being in
the tax system, you just wrap an insurance policy around it and say this is tax
exempt until I die. As long as you don't reach in and take out any of the money
it's not an issue. Very wealthy people are not taking the money.

City: One of the best analogies in your book is a
fable about a village in wine country that holds an annual festival. Each
vintner pours a jug of his wine into a large vat to create a village blend. The
last vintner had a bad year so he pours water into the vat, believing the
dilution won't be noticed. When the cask is uncorked, out flows water.

Johnston:
If one person cheats, nobody notices; if everybody cheats, there's no party for
anyone. Just as the super rich cheat when they don't pay their taxes --- and
benefit from it when they strip law enforcement of its capacity to punish them
--- the working class, the poor, the middle class, and the upper-middle class
cheat when they spend their time reading about Jennifer Lopez instead of being
citizens.

Citizenship is a duty and an
obligation; people need to be involved. They need to be talking to their
friends and neighbors. We need to listen to everybody. Rush Limbaugh
occasionally says something really insightful and smart. Noam Chomsky, for all
the crazy things he says, every now and then says something pretty smart that
we can all learn from.

In a democracy the wealthy will
always have disproportionate influence on government, even if we have publicly
financed campaigns, because they have the time and the access and they can hire
proxies to work for them. They have needs they will articulate. Historically,
the influence of the wealthy in America has been offset by large numbers of
people who are not wealthy, but who have been involved in politics and have
been a countervailing force. That force is basically gone and to the degree
that it remains, it's full of blue-collar workers who become advocates for the
rich: "I make $14 an hour but, by God, I'm concerned about overtaxing Bill
Gates!"

City: That's my problem with Rush Limbaugh; he
convinces people it's about them.

Johnston:
That's what I call ideological marketing. Nobody needs Brylcreem, but when you
and I were growing up lots of men used Brylcreem. TV ads implied: Use Brylcreem
and beautiful women will run their fingers through your hair. Nobody needs to
drink beer. Drink lots of beer and the Swedish Bikini Team will show up at your
door.

Now we have ideological marketing.
Pay more taxes so that the rich can pay less in taxes and you'll be better off
because you'll have a job. Well guess what? It is absolutely true that the very
wealthy, if they are allowed to keep more of their money, as the president puts
it, will invest in jobs. They're doing that in China, India, and Thailand.
Foreign aid is a miniscule portion of the US budget. To those on the left who
want America to have a big foreign-aid program, I've got news for them: We have
that foreign aid program!

There's no reason why we can't vote
to overtax the middle class and the upper-middle class to benefit the super
rich. It's absolutely constitutional to do that. I just don't think that if
people in the $30,000 to $500,000 category understood that, they would vote for
it. But I also know that when I give a talk, and some guy gets up and says,
"You know, I made $30,000 and frankly, I don't care how heavily they tax people
who make $200,000," they're not thinking very carefully. To him $200,000 is
seven times what he makes. It's a lot of money, but the guy who makes $200,000
has a lot more in common with him than the guy who makes $20 million a year.

City: The average person reading this is
thinking: I'm careful to save every slip from my Salvation Army donations and
the super rich are getting away with all of this?

Johnston:
Now you've gotten to what really motivated me about the book. The creation of
the United States of America was not a simple task. For all the flaws and all
the problems we have, this is the greatest idea in the history of the world. We
do not need King George to tell us how to run our lives. We can make decisions
for ourselves, and we will work out our own lives by creating a government to
serve our interests.

It is not written in stone that
there will always be an America. It is not an entitlement, and if anyone doubts
that they can read William Pierce's novel, The
Turner Diaries, which inspired Timothy McVeigh to blow up the Murrah
Federal Building in Oklahoma City because [McVeigh] thinks the United States
government is a criminal organization.

Guess what? Lots of people think the
United States Government is a criminal organization --- people on the left and
people on the right. I think that's an appalling, dangerous thought, but why do
they think that?

They think that because a narrow
group of Americans has been exercising its constitutional right and they have
been pursuing getting the government remade to serve their interests. And the
middle class, upper-middle class, working class, and the poor have withdrawn
from politics. In a democracy, those people who are involved get to shape the
government, and those who are not involved don't get to.

Right now we're getting a government
that increasingly represents the interests of a narrow group of people: those
among the rich who don't want to pay taxes. They're driving the agenda and they
are undermining America. I want America to endure. I have four grandsons. I
want my grandsons to be grandfathers in America. Long after I'm gone, I want
America to be here. I don't want to contemplate that someday children will sit
in a school and be given a lesson about "the United States of America was." And
making democracy work is an endless vigil.